Assume that on January 1, 2014, N-Tech sells its main computer system to First Tech Leasing Co. for $1,500,000 and immediately leases the computer system back. The relevant information is as follows.

1. The computer was carried on N-Tech’s books at a value of $900,000.

2. The term of the noncancelable lease is 8 years; title will transfer to N-Tech.

3. The lease agreement requires equal rental payments of $261,022.09 at the end of each year.

4. The incremental borrowing rate for N-Tech is 10%. N-Tech is aware that First Tech Leasing Co. set the annual rental to insure a rate of return of 8%.

5. The computer has a fair value of $1,500,000 on January 1, 2014, and an estimated economic life of 8 years.

6. N-Tech pays executory costs (insurance and personal property taxes) of $15,000 per year.

Instructions

Prepare the journal entries for both the lessee and the lessor for 2014 to reflect the sale and leaseback agreement. No uncertainties exist, and collectibility is reasonably certain.